Stretching your savings dollar when rates are low

Stretching your savings dollar when rates are low

While home owners around Australia might be rejoicing, the Reserve Bank of Australia’s (RBA) latest cash rate decision will leave savers with not much to celebrate. The RBA board decided on April 7 to leave the cash rate unchanged at the record-low rate of 2.25 percent, which means another month of ultra low interest rates for savings accounts. 

In fact, it seems avid savers won’t have higher rates to look forward to any time soon — in his statement, RBA governor Glenn Stevens hinted that the cash rate is likely to fall even lower in the future.

All of this might leave Australians scratching their heads and wondering what to do with their savings. In addition to comparing savings accounts and finding one with the most advantageous rate, there are alternatives that you can take to make your savings dollar go that much further.

Slash your debts

At first, you might not think of paying down debt as saving money. But getting yourself out of the red and back in black is like an inverted form of saving — you’re preventing yourself from falling deeper into the debt hole by accruing lots of interest.

A period of low interest rates is an ideal time to get rid of as much of your ‘bad debt’ as possible — consumption debt, like credit card balances, or the total you have left on a car or personal loan. According to the Australian Bureau of Statistics, the average debt for both vehicle loans and other consumption loans in 2011-12 was $19,500 each  — hardly a number to scoff at. The income you would have put toward your savings or making interest repayments can instead go toward whittling this down.

Zero in on your home loan

Speaking of debt, a low interest rate environment is also a good time to service your ‘good debt’. In this case, we’re talking about the largest bit of ‘good debt’ you likely have — a mortgage. Rather than squirrelling money away into a savings account, an alternative destination for your money could be a 100 percent offset account on your home loan. The more of your hard-earned savings you put into here, the smaller your home loan balance, and the less interest you have to pay. 

In essence, you’re investing in your home, with the knowledge that as you pay it off over time the equity in the property is steadily growing. This equity can eventually be used to serve the same purpose as a savings account, including bankrolling your retirement or even being used to fund certain large purchases, with the right loan attached. Plus, you can always withdraw the money in the offset account in emergencies.

Shop around for some high-interest alternatives

There are a variety of high interest savings accounts out there that can prove useful when rates are low. Most people think of term deposits, but there are a number of alternatives that can help your savings really stretch. 

In March 2014, Roy Morgan reported that the number of Australians with such accounts climbed by 1.5 million people over the preceding five years. That’s a 44 percent increase. One of these options that has proven increasingly popular is the bonus interest or reward account, which provides a bonus rate of interest on top of the normal rate if certain conditions are met. This could be anything from refraining from withdrawing to depositing a certain amount each month.  

Become a super saver

For a lot of people, their savings will go toward funding their lifestyle once retirement rolls around. If interest rates are low, it may therefore also be a good idea to simply stash more money in your super — your savings will ultimately end up in the same place anyway, after all.

Consider entering into a salary sacrificing arrangement with your employer, whereby the portion of your future pay cheque that would have been your savings goes instead to your superannuation account. You’ll not only have more in the kitty when you decide to hang up your hat, you’ll also be paying less tax. And if you’ve picked a growth investment option for your super, you could even see these funds grow at a significantly faster pace.

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Learn more about savings accounts

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)